I have tested a wide variety of different XviD encoding methods during my review of the product and it seems to give issues with certain encoding features. The main two that gives issues include the B-VOP setting of 2 maximum consecutive B-VOPs and Global Motion Compensation(GMC). When 2 or more consecutive B-VOPs are used, the player drops frames during playback. If GMC is enabled, the picture frequently freezes, often for several seconds at a time.
As far as I'm aware of, unfortunately it is not possible to edit the number of consecutive B-VOPs or disable GMC in an existing XviD encoding, at least without re-encoding the file. However you can edit these in the XviD Configuration prior to encoding. To do this, go into the XviD encoder configuration dialogue. if the "Profile @ Level" option is set to "(unrestricted)", change this to "Advanced Simple @ L5". Click the 'More...' button to the right of this. Ensure there is no check beside "Global Motion Compensation" and if the "Max consecutive BVOPs:" entry is 2 or greater, change this to '1'. Now, any new XviD encodings you make should play with smooth motion on your Lite-On.
I have tested XviD encodings using different aspect ratios, Adaptive Quantization, AC3 Audio track, Interlaced & progressive encodings, Packed bitstream, Quater Pixel and two soundtracks and all played back without any issue, at least on my player.
Unfortunately, I have tested very little when it comes to DivX encoding, so I can't really provide much advice when it comes to which DivX encoding features works well or give problems.